Total market investors, do you feel comfortable with only a handful of companies at the top?
-
- Posts: 1287
- Joined: Tue Jan 30, 2018 7:23 am
Total market investors, do you feel comfortable with only a handful of companies at the top?
I wasn't sure how to phrase this, but one thing I noticed from reading this article (https://ercouncil.org/2019/top-ten-comp ... -20-years/) is that the total market cap of the largest companies in the index relative to the rest of the index seems to be the highest in history. Additionally, it looks like in any 5 - 10 year period, the companies "at the top" have always rotated out, being replaced by other companies who worked their way up. For example, Shell, GE, Wells Fargo, etc. are no longer at the top.
Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles?
Or, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation?
Personally, I hold VTWAX (Vanguard Total World Index Fund) for my total market exposure and am excited to see what happens with International over the next 40 years.
Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles?
Or, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation?
Personally, I hold VTWAX (Vanguard Total World Index Fund) for my total market exposure and am excited to see what happens with International over the next 40 years.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I'm not terribly worried. Apple and Google are pretty concentrated, but Amazon is extremely diverse: (online retail, in-person retail, shipping, web services, movie and TV content...)
And, as you mentioned, as a total-market investor, I already own the next big winner. Indexing doesn't guarantee the best returns, it guarantees returns close to the index, which also happen to beat most active investors. Diversification reduces risk.
And, as you mentioned, as a total-market investor, I already own the next big winner. Indexing doesn't guarantee the best returns, it guarantees returns close to the index, which also happen to beat most active investors. Diversification reduces risk.
-
- Posts: 1287
- Joined: Tue Jan 30, 2018 7:23 am
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
When you say active investors, do you include tilters in that? Or mostly people buying/selling randomly/on a whim? Passive tilters aren't necessarily "active"... they could also just let their allocation sit for 40+ years and rebalance.jpelder wrote: ↑Fri Apr 16, 2021 11:20 am I'm not terribly worried. Apple and Google are pretty concentrated, but Amazon is extremely diverse: (online retail, in-person retail, shipping, web services, movie and TV content...)
And, as you mentioned, as a total-market investor, I already own the next big winner. Indexing doesn't guarantee the best returns, it guarantees returns close to the index, which also happen to beat most active investors. Diversification reduces risk.
-
- Posts: 3289
- Joined: Mon Nov 24, 2014 10:30 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I have no concern. There has always been only a handful of the biggest companeis and they rotate.
I am a total world equity investor myself.. (with low risk US only bond like investments/ stable value/ TSP G Fund).
I am a total world equity investor myself.. (with low risk US only bond like investments/ stable value/ TSP G Fund).
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I'm talking about stock pickers.manlymatt83 wrote: ↑Fri Apr 16, 2021 11:22 amWhen you say active investors, do you include tilters in that? Or mostly people buying/selling randomly/on a whim? Passive tilters aren't necessarily "active"... they could also just let their allocation sit for 40+ years and rebalance.jpelder wrote: ↑Fri Apr 16, 2021 11:20 am I'm not terribly worried. Apple and Google are pretty concentrated, but Amazon is extremely diverse: (online retail, in-person retail, shipping, web services, movie and TV content...)
And, as you mentioned, as a total-market investor, I already own the next big winner. Indexing doesn't guarantee the best returns, it guarantees returns close to the index, which also happen to beat most active investors. Diversification reduces risk.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
What’s the alternative? Perhaps an equal weight ETF like RSP? I held this for awhile, was underwhelmed, and thankfully tax loss harvested out of it last March.
Will one of the top holdings eventually fail? Sure. But creative destruction (as they call it) is not solely the province of mega corps. It will ideally be distributed at all levels of a healthy capitalist society.
So yeah, if you’re concerned about this then consider the alternatives and evaluate if they might be better.
Will one of the top holdings eventually fail? Sure. But creative destruction (as they call it) is not solely the province of mega corps. It will ideally be distributed at all levels of a healthy capitalist society.
So yeah, if you’re concerned about this then consider the alternatives and evaluate if they might be better.
- nisiprius
- Advisory Board
- Posts: 52219
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Yes.
I feel uncomfortable that we are in an age of consolidation of enterprises, and that the pendulum is swinging once again toward monopolies and oligopolies, but not that the stock market reflects it.
This is mostly a false alarm raised to scare people who haven't paid much attention to what the composition of the stock market is normally like... or to what the rationale for cap-weighting really is. There isn't a lot of money to be made in cap-weighted total market index funds, and Vanguard and other firms pretty much have that sewed up, so there is an obvious self-interest in everybody else attacking cap-weighting.
A common sales technique is to state some statistic or unfamiliar fact that is true, in a way that suggests there is something awful about it. A roofer once told me, in a scandalized voice, that the competitors' shingles had ground-up oyster shells in them. You may remember the Dilbert cartoon in which the pointy-haired boss is convinced that his employees are malingering they are taking 40% of their sick days on Mondays and Fridays.
The rationale for cap-weighting is that the stock market itself is cap-weighted. You need to decide whether or not you want your index fund to mirror the market. On p. 202 of the 2002 edition of Stocks for the Long Run, Jeremy Siegel wrote that
But the point is that if you want to mirror the market, then that's the decision. You want to mirror the market as it really is.
I feel uncomfortable that we are in an age of consolidation of enterprises, and that the pendulum is swinging once again toward monopolies and oligopolies, but not that the stock market reflects it.
This is mostly a false alarm raised to scare people who haven't paid much attention to what the composition of the stock market is normally like... or to what the rationale for cap-weighting really is. There isn't a lot of money to be made in cap-weighted total market index funds, and Vanguard and other firms pretty much have that sewed up, so there is an obvious self-interest in everybody else attacking cap-weighting.
A common sales technique is to state some statistic or unfamiliar fact that is true, in a way that suggests there is something awful about it. A roofer once told me, in a scandalized voice, that the competitors' shingles had ground-up oyster shells in them. You may remember the Dilbert cartoon in which the pointy-haired boss is convinced that his employees are malingering they are taking 40% of their sick days on Mondays and Fridays.
The rationale for cap-weighting is that the stock market itself is cap-weighted. You need to decide whether or not you want your index fund to mirror the market. On p. 202 of the 2002 edition of Stocks for the Long Run, Jeremy Siegel wrote that
You may agree with this or not--it is possible to argue that there are better weightings, although I personally am skeptical.It can be shown that maximum diversification is achieved by holding each stock in proportion to its value to the entire market.
But the point is that if you want to mirror the market, then that's the decision. You want to mirror the market as it really is.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
OP,
In a stock bubble, it is usually lead by the Large Growth stocks. And, the market will go irrational. I hedged by keeping 40% of my portfolio into the actively managed Wellington Fund and 20% into the mini-Larry (10% SCV + 10% Intermediate-Term Treasury). Only 40% of my portfolio is in the 3-funds passive index.
KlangFool
In a stock bubble, it is usually lead by the Large Growth stocks. And, the market will go irrational. I hedged by keeping 40% of my portfolio into the actively managed Wellington Fund and 20% into the mini-Larry (10% SCV + 10% Intermediate-Term Treasury). Only 40% of my portfolio is in the 3-funds passive index.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
- nisiprius
- Advisory Board
- Posts: 52219
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
RSP, the equal-weighted S&P index ETF, quadog mentioned, is an interesting case to argue about. The problem is that people like to compare it to the cap-weighted S&P solely on the basis of return. This is misleading because it is riskier and more volatile than the S&P itself.
Critics like to say cap-weighted funds are "concentrated" in larger companies (which is misuse of the word "concentrated," it is like calling beer "concentrated water"), and that you are putting too many eggs in too few baskets.
RSP seemingly avoids this by putting an equal 0.2% of the fund into each of the 500 stocks in the S&P 500.
But look what happened in 2008-2009.
Source
Blue: equal-weighted S&P 500 ETF, RSP.
Orange: normal, cap-weighted S&P 500 index ETF, SPY.
And again, in 2020:
So, instead of the cap-weighted fund being riskier than the equal-weighted fund, it was the other way around.
Critics like to say cap-weighted funds are "concentrated" in larger companies (which is misuse of the word "concentrated," it is like calling beer "concentrated water"), and that you are putting too many eggs in too few baskets.
RSP seemingly avoids this by putting an equal 0.2% of the fund into each of the 500 stocks in the S&P 500.
But look what happened in 2008-2009.
Source
Blue: equal-weighted S&P 500 ETF, RSP.
Orange: normal, cap-weighted S&P 500 index ETF, SPY.
And again, in 2020:
So, instead of the cap-weighted fund being riskier than the equal-weighted fund, it was the other way around.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
In my opinion, this proves that market cap weighted indexes are doing exactly what they are supposed to: holding more of the most succesful companies over time.
20 years ago, I could not have hand-picked the top 10 companies we see today in VTSAX (or VTWAX).
20 years ago, I could not have hand-picked the top 10 companies we see today in VTSAX (or VTWAX).
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Please correct me if I'm wrong, Bogleheads, but isn't the VTSAX fund composed of stocks across all caps (small, medium, and large)? If so--and even supposing the large caps are overvalued--why would a total-market investor, in particular, be worried right now?
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Like you said, the companies have always rotated out, and new winners take their place.manlymatt83 wrote: ↑Fri Apr 16, 2021 10:57 am I wasn't sure how to phrase this, but one thing I noticed from reading this article (https://ercouncil.org/2019/top-ten-comp ... -20-years/) is that the total market cap of the largest companies in the index relative to the rest of the index seems to be the highest in history. Additionally, it looks like in any 5 - 10 year period, the companies "at the top" have always rotated out, being replaced by other companies who worked their way up. For example, Shell, GE, Wells Fargo, etc. are no longer at the top.
Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles?
Or, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation?
Personally, I hold VTWAX (Vanguard Total World Index Fund) for my total market exposure and am excited to see what happens with International over the next 40 years.
But since we own them all, we also own those new winners who just grew 1000%. And we didn't have to pick which ones in advance.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
if you are just jumping in i guess i could envision some concern.
but if you've held vtsax for 20 years, hoorah and holding it for another 20 years, the top performers will trickle up in to the top 10 eventually. the top 10 in 2019 are similar to the top 10 today and guess what? they've avged well over 100% growth since the 2 years this was written!
I also remember somewhere some paper saying that majority of all stock market returns are a result of 4% of all the companies ever available or some crap. overweight me plz
but if you've held vtsax for 20 years, hoorah and holding it for another 20 years, the top performers will trickle up in to the top 10 eventually. the top 10 in 2019 are similar to the top 10 today and guess what? they've avged well over 100% growth since the 2 years this was written!
I also remember somewhere some paper saying that majority of all stock market returns are a result of 4% of all the companies ever available or some crap. overweight me plz
- neurosphere
- Posts: 5205
- Joined: Sun Jan 17, 2010 12:55 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Exactly, who will displace Apple and Google and Amazon? That would be a heck of a company or companies to own! Which actually, you DO if you own the total stock market or total world.HomerJ wrote: ↑Fri Apr 16, 2021 12:45 pmLike you said, the companies have always rotated out, and new winners take their place.manlymatt83 wrote: ↑Fri Apr 16, 2021 10:57 am Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles?
But since we own them all, we also own those new winners who just grew 1000%. And we didn't have to pick which ones in advance.
But then perhaps you don't want market weights, but rather perhaps you exclude Mega Caps (i.e. the biggest ones currently because maybe they are overvalued) and keep the rest. Sound reasonable. But at some point that new upstart company that grows to displace Google might grow out of your portfolio and into the Mega Cap index. But after that it could continue to grow 50x within the Mega cap index and you sold it when most of the growth was still in the future. Hmm. So perhaps one can come up with some criteria using market cap, %of market, maybe velocity/momentum...sigh. This stuff gets complicated REAL fast.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
-
- Posts: 478
- Joined: Wed Sep 26, 2018 7:03 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
This is a very interesting question and the short answer is YES, for me.
The trouble with coming up with an alternative to indexing is which way do you tilt? Total market ex-Top 10? Or a deep dive into small cap value? The top 10 companies of an index can carry enormous momentum in driving returns. In some years, it could be provide almost all of the return of the entire index itself. Of course they can fall quite a bit as well and be replaced by other rising companies.
I agree with the other comment that finding comfort in a high weight to the top companies is that the index is doing exactly what it is supposed to do. With that in mind, I do feel more comfortable as a global index investor than let's say an S&P 500 or US Total market investor.
Let's take a look at the top 10 holdings net assets by weight to overall fund
VFIAX - S&P 500 = 27.3%
VTSAX - US Total = 22.1%
VTWAX - Total World = 13.2%
The S&P 500 is over 2x concentrated at the top vs the Total World. This is a pretty significant difference for me - I'll take the global diversity any day for the long term.
The trouble with coming up with an alternative to indexing is which way do you tilt? Total market ex-Top 10? Or a deep dive into small cap value? The top 10 companies of an index can carry enormous momentum in driving returns. In some years, it could be provide almost all of the return of the entire index itself. Of course they can fall quite a bit as well and be replaced by other rising companies.
I agree with the other comment that finding comfort in a high weight to the top companies is that the index is doing exactly what it is supposed to do. With that in mind, I do feel more comfortable as a global index investor than let's say an S&P 500 or US Total market investor.
Let's take a look at the top 10 holdings net assets by weight to overall fund
VFIAX - S&P 500 = 27.3%
VTSAX - US Total = 22.1%
VTWAX - Total World = 13.2%
The S&P 500 is over 2x concentrated at the top vs the Total World. This is a pretty significant difference for me - I'll take the global diversity any day for the long term.
VTWAX and chill
-
- Posts: 1287
- Joined: Tue Jan 30, 2018 7:23 am
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I like your thinking and also why I’m VTWAX as well.bogledogle87 wrote: ↑Fri Apr 16, 2021 1:35 pm This is a very interesting question and the short answer is YES, for me.
The trouble with coming up with an alternative to indexing is which way do you tilt? Total market ex-Top 10? Or a deep dive into small cap value? The top 10 companies of an index can carry enormous momentum in driving returns. In some years, it could be provide almost all of the return of the entire index itself. Of course they can fall quite a bit as well and be replaced by other rising companies.
I agree with the other comment that finding comfort in a high weight to the top companies is that the index is doing exactly what it is supposed to do. With that in mind, I do feel more comfortable as a global index investor than let's say an S&P 500 or US Total market investor.
Let's take a look at the top 10 holdings net assets by weight to overall fund
VFIAX - S&P 500 = 27.3%
VTSAX - US Total = 22.1%
VTWAX - Total World = 13.2%
The S&P 500 is over 2x concentrated at the top vs the Total World. This is a pretty significant difference for me - I'll take the global diversity any day for the long term.
But then when you get into that thinking, then you end up saying... OK well I need crypto because that’s not part of total world. And then what about REITs? The total real estate market is no way reflected in the REITs that happen to be public companies. So then do I need to buy some of those?
To other people’s point, this gets really complicated really quickly. Agree VTWAX is as representative as you can get without complication.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Exactly. GE down, Tesla up.manlymatt83 wrote: ↑Fri Apr 16, 2021 10:57 amOr, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation?
To steal a thought from Nisiprius, in Total Market I owned Tesla before Tesla was cool.
(there were discussions a few months ago about how Tesla joining the SP500 might disrupt the market).
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
YES! I feel very comfortable owning all the companies by market weight at the lowest cost.manlymatt83 wrote: ↑Fri Apr 16, 2021 10:57 am I wasn't sure how to phrase this, but one thing I noticed from reading this article (https://ercouncil.org/2019/top-ten-comp ... -20-years/) is that the total market cap of the largest companies in the index relative to the rest of the index seems to be the highest in history. Additionally, it looks like in any 5 - 10 year period, the companies "at the top" have always rotated out, being replaced by other companies who worked their way up. For example, Shell, GE, Wells Fargo, etc. are no longer at the top.
Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles?
Or, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation?
Personally, I hold VTWAX (Vanguard Total World Index Fund) for my total market exposure and am excited to see what happens with International over the next 40 years.
I sleep well.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
-
- Posts: 478
- Joined: Wed Sep 26, 2018 7:03 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Good questions - an investor is then challenged in finding where to draw the line. Crypto, Commodities, Private Equity, Art, Baseball cards, on and on and on. Conventional wisdom generally points toward shying away from speculation with focus on real, income-producing assets with high probability of appreciation.manlymatt83 wrote: ↑Fri Apr 16, 2021 1:37 pm I like your thinking and also why I’m VTWAX as well.
But then when you get into that thinking, then you end up saying... OK well I need crypto because that’s not part of total world. And then what about REITs? The total real estate market is no way reflected in the REITs that happen to be public companies. So then do I need to buy some of those?
To other people’s point, this gets really complicated really quickly. Agree VTWAX is as representative as you can get without complication.
Rick Ferri has put out a pretty interesting solution in representing the Total Economy by adding additional weights to via proxy to Small Cap Value (Private Companies) and REIT (non-public). Pretty interesting idea for someone who feels compelled to better represent the economy.
Last edited by bogledogle87 on Fri Apr 16, 2021 2:07 pm, edited 1 time in total.
VTWAX and chill
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Tony are you taking those high potency sleeping pills again?abuss368 wrote: ↑Fri Apr 16, 2021 1:59 pmYES! I feel very comfortable owning all the companies by market weight at the lowest cost.manlymatt83 wrote: ↑Fri Apr 16, 2021 10:57 am I wasn't sure how to phrase this, but one thing I noticed from reading this article (https://ercouncil.org/2019/top-ten-comp ... -20-years/) is that the total market cap of the largest companies in the index relative to the rest of the index seems to be the highest in history. Additionally, it looks like in any 5 - 10 year period, the companies "at the top" have always rotated out, being replaced by other companies who worked their way up. For example, Shell, GE, Wells Fargo, etc. are no longer at the top.
Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles?
Or, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation?
Personally, I hold VTWAX (Vanguard Total World Index Fund) for my total market exposure and am excited to see what happens with International over the next 40 years.
I sleep well.
Tony
Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Both of the market plunges you cite were unrelated to issues of valuation. Both were more damaging to smaller companies than larger ones. And that said, if you chart RSP vs VOO starting on March 23, 2020 RSP Morningstar tells us that RSP's gain is 107.52% while VOO's is only 89.77%!nisiprius wrote: ↑Fri Apr 16, 2021 12:06 pm RSP, the equal-weighted S&P index ETF, quadog mentioned, is an interesting case to argue about. The problem is that people like to compare it to the cap-weighted S&P solely on the basis of return. This is misleading because it is riskier and more volatile than the S&P itself.
Critics like to say cap-weighted funds are "concentrated" in larger companies (which is misuse of the word "concentrated," it is like calling beer "concentrated water"), and that you are putting too many eggs in too few baskets.
RSP seemingly avoids this by putting an equal 0.2% of the fund into each of the 500 stocks in the S&P 500.
But look what happened in 2008-2009.
Source
Blue: equal-weighted S&P 500 ETF, RSP.
Orange: normal, cap-weighted S&P 500 index ETF, SPY.
And again, in 2020:
So, instead of the cap-weighted fund being riskier than the equal-weighted fund, it was the other way around.
It has captured the recovery of some out of favor sectors and sizes quite well over the past few months.
With charts like the ones you posted, it always matters more than we realize when you start the charting.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I would recommend reading chapter 6 "On Indexing" from Common Sense on Mutual Funds by Bogle....
From that chapter he recounts the heavy top in the late 1970s of GM, ATT and IBM and how they underperformed the broad market significantly bringing down the return of the 500 index in comparison to large blend mutual funds. That situation reversed as they became smaller pieces of the index and others rose to take their spot.
to that end - I am comfortable with it but with the expectation that the Total market will probably be muted for a period of time in the future despite the growth of companies below the top set, but I expect that eventually things will sort themselves out and I will be glad that I am a total market investor on the back end....
From that chapter he recounts the heavy top in the late 1970s of GM, ATT and IBM and how they underperformed the broad market significantly bringing down the return of the 500 index in comparison to large blend mutual funds. That situation reversed as they became smaller pieces of the index and others rose to take their spot.
to that end - I am comfortable with it but with the expectation that the Total market will probably be muted for a period of time in the future despite the growth of companies below the top set, but I expect that eventually things will sort themselves out and I will be glad that I am a total market investor on the back end....
-
- Posts: 1287
- Joined: Tue Jan 30, 2018 7:23 am
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
So why don't you tilt in the meantime, with the expectation that you'll unwind that in 10 or 20 years? Simplicity?anil686 wrote: ↑Fri Apr 16, 2021 2:20 pm I would recommend reading chapter 6 "On Indexing" from Common Sense on Mutual Funds by Bogle....
From that chapter he recounts the heavy top in the late 1970s of GM, ATT and IBM and how they underperformed the broad market significantly bringing down the return of the 500 index in comparison to large blend mutual funds. That situation reversed as they became smaller pieces of the index and others rose to take their spot.
to that end - I am comfortable with it but with the expectation that the Total market will probably be muted for a period of time in the future despite the growth of companies below the top set, but I expect that eventually things will sort themselves out and I will be glad that I am a total market investor on the back end....
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
That will require market timing. We don't know if the top companies will continue to outperform (like last year) or underperform. They'll eventually underperform but no one knows the timing of it. Now, factor tilt is a strategy, see how many SCV discussion on this forum but one can underperform for decades before being rewarded.manlymatt83 wrote: ↑Fri Apr 16, 2021 2:31 pmSo why don't you tilt in the meantime, with the expectation that you'll unwind that in 10 or 20 years? Simplicity?anil686 wrote: ↑Fri Apr 16, 2021 2:20 pm I would recommend reading chapter 6 "On Indexing" from Common Sense on Mutual Funds by Bogle....
From that chapter he recounts the heavy top in the late 1970s of GM, ATT and IBM and how they underperformed the broad market significantly bringing down the return of the 500 index in comparison to large blend mutual funds. That situation reversed as they became smaller pieces of the index and others rose to take their spot.
to that end - I am comfortable with it but with the expectation that the Total market will probably be muted for a period of time in the future despite the growth of companies below the top set, but I expect that eventually things will sort themselves out and I will be glad that I am a total market investor on the back end....
-
- Posts: 1841
- Joined: Fri Sep 28, 2018 4:59 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Since a very small percentage of companies account for the overwhelming percentage of returns, it doesn't concern or surprise me that the market is top-heavy.
-
- Posts: 974
- Joined: Thu Apr 11, 2019 4:28 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Yes, with the exception of Tesla
My posts are for entertainment purposes only.
-
- Posts: 1936
- Joined: Sun Jul 26, 2020 2:29 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Here's a recent M* market close. Large cap modestly down. Mid-cap and small-cap both up for the day -- but even together not enough weighting to bring the index into break-even or positive territory. Thus is the nature of cap-weighting. As Paul Merriman says, TSM behaves for all intents and purposes as large cap blend.mikejuss wrote: ↑Fri Apr 16, 2021 12:27 pm Please correct me if I'm wrong, Bogleheads, but isn't the VTSAX fund composed of stocks across all caps (small, medium, and large)? If so--and even supposing the large caps are overvalued--why would a total-market investor, in particular, be worried right now?
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* |
FIRE'd July 2023
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
What is the recommended way to adjust for this large-cap tilt?AlwaysLearningMore wrote: ↑Fri Apr 16, 2021 3:57 pmHere's a recent M* market close. Large cap modestly down. Mid-cap and small-cap both up for the day -- but even together not enough weighting to bring the index into break-even or positive territory. Thus is the nature of cap-weighting. As Paul Merriman says, TSM behaves for all intents and purposes as large cap blend.mikejuss wrote: ↑Fri Apr 16, 2021 12:27 pm Please correct me if I'm wrong, Bogleheads, but isn't the VTSAX fund composed of stocks across all caps (small, medium, and large)? If so--and even supposing the large caps are overvalued--why would a total-market investor, in particular, be worried right now?
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
-
- Posts: 2390
- Joined: Mon Dec 17, 2018 5:49 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
manlymatt83 wrote: ↑Fri Apr 16, 2021 10:57 am I wasn't sure how to phrase this, but one thing I noticed from reading this article (https://ercouncil.org/2019/top-ten-comp ... -20-years/) is that the total market cap of the largest companies in the index relative to the rest of the index seems to be the highest in history. Untrue. Additionally, it looks like in any 5 - 10 year period, the companies "at the top" have always rotated out, being replaced by other companies who worked their way up. For example, Shell, GE, Wells Fargo, etc. are no longer at the top. Thats how index funds work.
Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? Yes.When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles? No.
Or, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation? Yes
Personally, I hold VTWAX (Vanguard Total World Index Fund) for my total market exposure and am excited to see what happens with International over the next 40 years.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
-
- Posts: 2697
- Joined: Fri Apr 25, 2014 6:38 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I only invest in VTSAX/VFIAX. Not only am I 100% comfortable, I am very, very happy with my investment results.manlymatt83 wrote: ↑Fri Apr 16, 2021 10:57 am I wasn't sure how to phrase this, but one thing I noticed from reading this article (https://ercouncil.org/2019/top-ten-comp ... -20-years/) is that the total market cap of the largest companies in the index relative to the rest of the index seems to be the highest in history. Additionally, it looks like in any 5 - 10 year period, the companies "at the top" have always rotated out, being replaced by other companies who worked their way up. For example, Shell, GE, Wells Fargo, etc. are no longer at the top.
Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles?
Or, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation?
Personally, I hold VTWAX (Vanguard Total World Index Fund) for my total market exposure and am excited to see what happens with International over the next 40 years.
-
- Posts: 2390
- Joined: Mon Dec 17, 2018 5:49 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
bogledogle87 wrote: ↑Fri Apr 16, 2021 1:59 pmGood questions - an investor is then challenged in finding where to draw the line. Crypto, Commodities, Private Equity, Art, Baseball cards, on and on and on. Conventional wisdom generally points toward shying away from speculation with focus on real, income-producing assets with high probability of appreciation. I would add liquidity and low cost access.manlymatt83 wrote: ↑Fri Apr 16, 2021 1:37 pm I like your thinking and also why I’m VTWAX as well.
But then when you get into that thinking, then you end up saying... OK well I need crypto because that’s not part of total world. And then what about REITs? The total real estate market is no way reflected in the REITs that happen to be public companies. So then do I need to buy some of those?
To other people’s point, this gets really complicated really quickly. Agree VTWAX is as representative as you can get without complication.
Rick Ferri has put out a pretty interesting solution in representing the Total Economy by adding additional weights to via proxy to Small Cap Value (Private Companies) and REIT (non-public). Pretty interesting idea for someone who feels compelled to better represent the economy.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I can guarantee you Tesla and Google won't be in the top ten in twenty years. Tesla because it's a scam company, but google is really struggling to expand their business in a profitable way.
Facebook is another company I can't see sticking around. Same problem as Google. Selling data had a cap and buying tons of smaller businesses isn't working for them either.
Apple has no real competition in their specific sector of the phone industry, the fashion accessory phone for tech illiterate people. I don't see them going away for awhile
I also see Berkshire declining after they lose their celebrity status when Buffett is gone.
None of this matters though. Its the natural way of the market and I could easily be completely wrong and Google becomes another branch of congress
Facebook is another company I can't see sticking around. Same problem as Google. Selling data had a cap and buying tons of smaller businesses isn't working for them either.
Apple has no real competition in their specific sector of the phone industry, the fashion accessory phone for tech illiterate people. I don't see them going away for awhile
I also see Berkshire declining after they lose their celebrity status when Buffett is gone.
None of this matters though. Its the natural way of the market and I could easily be completely wrong and Google becomes another branch of congress
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I'm comfortable with the 99.6% of the investable global cap weighted stock market held by VT / VTWAX.
I add in the missing .4%.
I add in the missing .4%.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
-
- Posts: 9479
- Joined: Sun Oct 08, 2017 7:16 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
I am comfortable with there being only a handful of companies at the top. I hold broad market index funds, so as new companies rise to the top, I will already be invested in them. I'm an old guy, so I remember when the companies at the top were totally different from today. I'm sure the list will change again before I die.
-
- Posts: 1287
- Joined: Tue Jan 30, 2018 7:23 am
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
In VTWAX yes. In VTSAX no. So I use the former.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Frontier markets.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
It's not a tilt. It's the market. That's the nature of the market.
But a lot of people use small cap value to tilt away from the market. You could use small cap blend. Or mid cap. Or extended market. Or whatever you want that's not large cap growth.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
- arcticpineapplecorp.
- Posts: 15081
- Joined: Tue Mar 06, 2012 8:22 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
look at 24 years of big company change (1994-2018):manlymatt83 wrote: ↑Fri Apr 16, 2021 10:57 am I wasn't sure how to phrase this, but one thing I noticed from reading this article (https://ercouncil.org/2019/top-ten-comp ... -20-years/) is that the total market cap of the largest companies in the index relative to the rest of the index seems to be the highest in history. Additionally, it looks like in any 5 - 10 year period, the companies "at the top" have always rotated out, being replaced by other companies who worked their way up. For example, Shell, GE, Wells Fargo, etc. are no longer at the top.
Given that information, isn't it safe to say that at some point Apple, Google, and Amazon will fail to maintain their lead? When that happens, due to their sheer size, wouldn't the fall be more painful this time than in previous cycles?
Or, to Taylor's point, will owning the entire market allow one to benefit from the newcomers as they ride up to the top, negating any real loss from the rotation?
https://americanbusinesshistory.org/lar ... 1994-2018/
big companies got smaller and small companies got bigger.
and yet what happened to the total market over those 24 years:
source: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
the initial investment was 8.6 X as large in the end.
when someone sells their stock of those big companies where's the money go?
somewhere else right?
owning the market means money gets reallocated to companies believed to utilize capital in the highest/most efficient manner.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
So you are invested at market weight?
Tony
John C. Bogle: “Simplicity is the master key to financial success."
-
- Posts: 1936
- Joined: Sun Jul 26, 2020 2:29 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Paul Merriman interviewed by Rick Ferri February 2020, Bogleheads on Investing- Episode 018 transcriptFerdinand2014 wrote: ↑Fri Apr 16, 2021 5:22 pmbogledogle87 wrote: ↑Fri Apr 16, 2021 1:59 pmGood questions - an investor is then challenged in finding where to draw the line. Crypto, Commodities, Private Equity, Art, Baseball cards, on and on and on. Conventional wisdom generally points toward shying away from speculation with focus on real, income-producing assets with high probability of appreciation. I would add liquidity and low cost access.manlymatt83 wrote: ↑Fri Apr 16, 2021 1:37 pm I like your thinking and also why I’m VTWAX as well.
But then when you get into that thinking, then you end up saying... OK well I need crypto because that’s not part of total world. And then what about REITs? The total real estate market is no way reflected in the REITs that happen to be public companies. So then do I need to buy some of those?
To other people’s point, this gets really complicated really quickly. Agree VTWAX is as representative as you can get without complication.
Rick Ferri has put out a pretty interesting solution in representing the Total Economy by adding additional weights to via proxy to Small Cap Value (Private Companies) and REIT (non-public). Pretty interesting idea for someone who feels compelled to better represent the economy.
“And what do we get when we get the S&P 500 and the total market index? We get a cap weighted portfolio that means that almost all of your exposure to risk is in large cap growth.
I shouldn’t say almost all, but certainly over 50 percent is in large cap growth. And that’s not necessarily bad but when we look at the past that the academics have recreated going back to the ‘20s, what we know is– first thing we know that I want to clear up– is the return of the S&P 500 is virtually the same over the last 90 years. That the total market index is not turning out a better rate of return, or it does not create an expected higher return than the S&P 500. Oh they’ll say they’ve got small cap and they’ve got value, but it’s so little that those big companies that are in there, because it’s cap weighted, they just walk all over the small cap companies in terms of impact on the return. (emphasis added)
So what I advocate for is in the US market is a simple approach where you would spread the money away, not based on cap weighted but based on asset class weighted. And this is not anything I ever came up with Rick. I don’t think I’ve had an original thought in my life, but I went through the DFA process, as you did, and I think they teach you a lot of really good stuff about how investing works. And one way to improve earnings, at least looking backwards, is to rebuild the portfolio, to have some small and some value and some large cap in the US.” https://tinyurl.com/sbcab98
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* |
FIRE'd July 2023
-
- Posts: 1936
- Joined: Sun Jul 26, 2020 2:29 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
To point out that it's not a rarity for "TSM" can close down on a day when mid-caps and small-caps are up:mikejuss wrote: ↑Fri Apr 16, 2021 12:27 pm Please correct me if I'm wrong, Bogleheads, but isn't the VTSAX fund composed of stocks across all caps (small, medium, and large)? If so--and even supposing the large caps are overvalued--why would a total-market investor, in particular, be worried right now?
Paul Merriman interviewed by Rick Ferri February 2020, Bogleheads on Investing podcast - Episode 018 transcript
“And what do we get when we get the S&P 500 and the total market index? We get a cap weighted portfolio that means that almost all of your exposure to risk is in large cap growth.
I shouldn’t say almost all, but certainly over 50 percent is in large cap growth. And that’s not necessarily bad but when we look at the past that the academics have recreated going back to the ‘20s, what we know is– first thing we know that I want to clear up– is the return of the S&P 500 is virtually the same over the last 90 years. That the total market index is not turning out a better rate of return, or it does not create an expected higher return than the S&P 500. Oh they’ll say they’ve got small cap and they’ve got value, but it’s so little that those big companies that are in there, because it’s cap weighted, they just walk all over the small cap companies in terms of impact on the return.
So what I advocate for is in the US market is a simple approach where you would spread the money away, not based on cap weighted but based on asset class weighted. And this is not anything I ever came up with Rick. I don’t think I’ve had an original thought in my life, but I went through the DFA process, as you did, and I think they teach you a lot of really good stuff about how investing works. And one way to improve earnings, at least looking backwards, is to rebuild the portfolio, to have some small and some value and some large cap in the US.” https://tinyurl.com/sbcab98
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* |
FIRE'd July 2023
-
- Posts: 157
- Joined: Sat Mar 06, 2021 4:22 pm
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
That's the way I like it. I don't care that they rotate out, they'll do so in their own time. It takes a company of a certain size to even go public and get listed, that in itself is an achievement.
It's a big responsibility being in the public eye, and once you're at this stage, it used to be that these companies went into risk-averse mode, IBM and GE come to mind. Squeezing, cutting, grinding just to make the next quarter. Today, you have companies with wider margins, better balance sheets, and more cash to buy other companies with competing products and absorb their enemies. Some start projects from scratch (like Google Fiber) that have NEVER been profitable and are more of a pet project than anything.
It's nice to see a company offer a useful service or flex their industry prowess, even if the idea fully doesn't take off. I continue to be amazed every day at the ideas that put companies on the map, and fuel their rise to the top.
It's a big responsibility being in the public eye, and once you're at this stage, it used to be that these companies went into risk-averse mode, IBM and GE come to mind. Squeezing, cutting, grinding just to make the next quarter. Today, you have companies with wider margins, better balance sheets, and more cash to buy other companies with competing products and absorb their enemies. Some start projects from scratch (like Google Fiber) that have NEVER been profitable and are more of a pet project than anything.
It's nice to see a company offer a useful service or flex their industry prowess, even if the idea fully doesn't take off. I continue to be amazed every day at the ideas that put companies on the map, and fuel their rise to the top.
Re: Total market investors, do you feel comfortable with only a handful of companies at the top?
Ctrl-f: Micr - no results found. As usual MSFT snubbed out of a FAANG+ discussion despite being #2 currently and #1 quite recently. As an employee, it's the only company I now happen to hold individual stock in (cost basis too low to sell). Despite unloading as soon as I acquire more to reduce the risk of having my income and wealth tied together, my old shares continue to keep pace with just about everything else in my taxable account. The lack of buzz makes me feel better about being so overexposed.
Remind me in a decade to revisit the list, but my guess is AAPL, AMZN, MSFT, and maybe GOOG will be the only ones with enough staying power to still be in the S&P 10.
Remind me in a decade to revisit the list, but my guess is AAPL, AMZN, MSFT, and maybe GOOG will be the only ones with enough staying power to still be in the S&P 10.